The Rise of AI in Stock Trading
Using AI to trade stocks at home feels like it might be the next step in a long series of technological advances that have democratized individual retail investing, for better or for worse. Computer-based stock trading for individuals dates back to 1984, when Charles Schwab introduced electronic trading services for dial-up customers. E-Trade launched in 1992, and by the late 1990s, online brokerages had transformed retail investing, dropping commission fees from hundreds of dollars per trade to under $10.
A Brief History of Automated Investing
The first “robo-advisors” appeared after the 2008 financial crisis, which began the rise of automated online services that use algorithms to manage and rebalance portfolios based on a client’s goals. Services like Betterment launched in 2010, and Wealthfront followed in 2011, using algorithms to automatically rebalance portfolios. By the end of 2015, robo-advisors from nearly 100 companies globally were managing $60 billion in client assets.
The Arrival of ChatGPT and AI Stock Picking
The arrival of ChatGPT in November 2022 arguably marked a new phase where retail investors could directly query an AI model for stock picks rather than relying on pre-programmed algorithms. But experts acknowledged that ChatGPT cannot access data behind paywalls, potentially missing crucial analyses available through professional services. To get better results, experts create specific prompts like “assume you’re a short analyst, what is the short thesis for this stock?” or “use only credible sources, such as SEC filings.”
The Hazards of AI Stock Picking
“AI models can be brilliant,” Dan Moczulski, UK managing director at eToro, told Reuters. “The risk comes when people treat generic models like ChatGPT or Gemini as crystal balls.” He noted that general AI models “can misquote figures and dates, lean too hard on a pre-established narrative, and overly rely on past price action to attempt to predict the future.”
Beyond chatbots, reliance on financial algorithms is growing. The “robo-advisory” market, which includes all companies providing automated, algorithm-driven financial advice from fintech startups to established banks, is forecast to grow roughly 600 percent by 2029, according to data-analysis firm Research and Markets.
Risks and Concerns
“If people get comfortable investing using AI and they’re making money, they may not be able to manage in a crisis or downturn,” experts warned Reuters. The concern extends beyond individual losses to whether retail investors using AI tools understand risk management or have strategies for when markets turn bearish.
Conclusion
The rise of AI in stock trading has the potential to revolutionize the way individuals invest, but it also comes with significant risks. As more retail investors turn to AI tools for investment decisions, it’s essential to understand the limitations and potential pitfalls of these tools. By being aware of the hazards of AI stock picking and taking a thoughtful and informed approach, investors can make the most of these new technologies while minimizing their risks.
Frequently Asked Questions
Q: What is a robo-advisor?
A robo-advisor is an automated online service that uses algorithms to manage and rebalance portfolios based on a client’s goals.
Q: Can ChatGPT be used for stock picking?
Yes, ChatGPT can be used for stock picking, but it’s essential to understand its limitations and potential biases. Experts recommend creating specific prompts to get better results.
Q: What are the risks of using AI for stock trading?
The risks of using AI for stock trading include relying too heavily on past price action, misquoting figures and dates, and not understanding risk management or having strategies for when markets turn bearish.
